The debt ceiling, what is it, and why I don’t care.

You can’t escape it. Every news source is talking about it constantly. I am not talking about Caylee, or even the celebrity of the moment, but the debt ceiling. For those living under a rock, the debt ceiling is a hard limit on the amount of government debt that can be accumulated. It was first put into law in 1917, and the ceiling has been raised many times since then. Reaching the ceiling isn’t all bad, it opens up the (very necessary IMHO) conversation on why we are accumulating so much debt and whether we should continue to do so. Now if we exceed this debt limit, the government technically goes into default, meaning it can’t pay its debts off.

This would be a tremendous problem not just for the US, but for the whole world. One of the underlying “rules” of the current economic world is that the dollar is safe, and considering that Europe is in a maelstrom of its own, that still holds. But the much bigger assumption is that US treasury notes are risk free. If that axiom fails, we are looking at an entirely different financial market structure in the future- one that likely wouldn’t be advantageous to the US.

Sounds pretty bad eh? So why don’t I care? I don’t think Congress has the balls to let us default. The last 5 years have been highly uncertain, particularly with respect to the financial markets, and I don’t think anyone wants to move any further into uncharted territory than we already are. I am veering off into political territory which I want to avoid, but I think the biggest risk is that the Republicans, which from my seat have shown a much greater propensity to “throw fists” may try to block any deal that doesn’t give their agenda huge concessions and force a default- the ensuing crisis and economic damage would probably ensure our next President is Republican. I think this chance is still very, very small though.

Posted by Ignatius Reilly on Wednesday, July 27, 2011, at 1:17 pm.Filed under Uncategorized.Follow any responses to this post with its comments RSS feed.Both comments and trackbacks are currently closed.